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Kenyan banks in tight situation over inflation, GDP pressures

IN Africa, Kenya remains one of the top investment destination helped by strong banking operation and solid financial market performance but things are reversing.

The dislocation in the macroeconomic space has filter through the Kenyan economy like many others but shock absorber is getting weak and local banks have been projected to feel the effect.

In its rating note, Fitch said Kenyan banks rebound is at risk after a strong recovery was reported in 2021. The local banks now face an uncertain operating environment outlook as global and domestic risks intensify.

High inflation, slowing gross domestic product (GDP) growth including a faltering Eurozone and a severe drought will affect business conditions for banks, Fitch said in its special report.

Analysts explain that the ensuing primary impact on banks’ credit profiles will come from elevated asset quality risks, but strong capital buffers underpin banks’ ability to absorb moderate shocks.

Analysts said Kenyan banks’ ratings are most sensitive to a downgrade of the sovereign rating, which is on a negative outlook, given the high concentration of banks’ operations within Kenya and significant sovereign debt exposure.

Fitch Ratings forecasts the average non-performing loan (NPL) ratio for the large banks will increase to around 14% in 2022 from 12.7% last year as weaker economic conditions and increasing inflation feed through to borrowers.

High default rate would hit the local deposit money banks with expectation that loan loss provision will inch higher in the current year amidst fast changing global market dynamics.

Kenyan banking sector non-performing (NPL) ratio rose to 14.7% at the end of second quarter of financial year 2022 from14.1% at the 2021 year end versus 14.5% in 2020.

However, Fitch noted that the country’s large banks’ strong profitability with 3.5% return on asset in 2021 and23.8% return on equity will remain a credit strength in 2022 despite adverse conditions and rising loan impairment charges.

The banks’ pre-tax profit for the sector rebounded strongly, up 76% in 2021 on the back of materially lower impairment charges and stronger earnings. READ:Kenyan Banks’ Rebound at Risk from Global Contagion –Fitch

“We believe net interest income will benefit from the approval of banks’ risk-based pricing models by the Central Bank of Kenya (CBK) and the rising interest rate environment”, Fitch said.

Regional expansion and deployment of digitalisation will support large banks’ earnings, the rating note said. Despite uncertainty leading up to Kenya’s August election, annual private-sector credit growth peaked at 12.3% in June 2022.

The positive trend was supported by lending to small, medium enterprises (SMEs) and households increased following the post-pandemic recovery and the approval of banks’ risk-based models.

However, analysts explain that banking sector capitalisation strengthened in 2021 due to higher retained earnings seen across the industry amidst slowdown in euro market raise.

Fitch said in its rating note that the average total capital adequacy ratio (CAR) for the larger banks increased to its highest level over the past four years, printed at 18.8% in 2021 versus 18.5% in the preceding year.

Large Kenyan banks are well-funded by stable and low-cost domestic customer deposits, supported by established domestic franchises and wide distribution channels, according to report.

There is a low reliance on external and foreign-currency funding, which, in turn, supports the banks’ sufficient liquidity positions, analysts said.

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